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On February 19, 2014, the Office of the Inspector General of the United States Department of Health and Human Services (“OIG”) released a report recommending two changes in the Medicare Diagnosis Related Group (“DRG”) payments that would significantly expand the scope of pre-admission outpatient services that would be bundled into a hospital’s DRG payment following an inpatient admission. Currently, Medicare does not separately reimburse a hospital for outpatient services that are (1) provided within 3 days of an inpatient admission, (2) related to the inpatient admission, and (3) delivered by an entity that is wholly-owned or operated by the admitting hospital. When each of these conditions is met, reimbursement for any pre-admission outpatient services is bundled into the hospital’s DRG payment for the inpatient stay. In its recently-released report, OIG recommends expanding both the length of the lookback window and the scope of entities whose services would be subject to the reduction.

1. Length of DRG Window Lookback Period

The underlying purpose of the 3-day DRG payment window is to prevent a provider from being paid for preadmission outpatient services that would have been incorporated into a DRG payment if they had been provided after admission. However, OIG notes that setting the lookback period at 3 days was a legislative decision that was not driven by any prevailing medical standard. As a result, OIG analyzed claims data to determine the extent to which a longer lookback period would more appropriately capture the full range of pre-admission outpatient services that are related to the inpatient stay. Based on its analysis, OIG recommended extending the DRG window to either 7 days or 14 days prior to the inpatient admission. OIG estimated that expanding the DRG window to 7 days would save Medicare approximately $100 million per year and expanding to 11 days would result in annual savings of approximately $210 million.

2. Ownership Structures Subject to DRG Window

OIG also analyzed the extent to which expanding the scope of entities subject to the DRG window would result in additional program savings. Under current rules, outpatient services are only subject to the DRG window if they are delivered at an entity that is wholly-owned or operated by the admitting hospital. In essence, the payment reduction applies vertically within a corporate structure and only captures services delivered by entities directly linked to the admitting hospital within that structure. OIG concluded that Medicare could realize annual savings of over $40 million if the rule was expanded horizontally across health systems such that outpatient services delivered by any institution affiliated with the admitting hospital would be subject to the payment reduction.

3. OIG’s Recommendations Are Not Likely To Be Implemented In The Near Future

Although OIG identified significant savings that could be achieved by the recommended changes and recommended that CMS pursue legislative action to implement those changes, CMS did not agree with OIG’s recommendations. As a result, the recommended changes in the DRG window are unlikely to be implemented in the near future. However, CMS’s reasons for rejecting OIG’s recommendation were procedural and not substantive. As a result, this issue will likely arise again in coming years, particularly given OIG’s history of advocating for expansion of the DRG window and CMS’s push to reduce expenditures.